The good news is that there is very little expenditure incurred on rental properties that is disallowable in the strict sense. For example, when a landlord makes a capital improvement to a property, such as adding an extension, it should still be allowable, but only when the property is sold. In other words, it is allowable as enhancement expenditure against any capital gain ultimately made on the sale (or other disposal) but please note that you will not get capital relief for, say, adding a conservatory only to knock it down again before sale!
Enhancement expenditure helps you later and property business expenditure helps you now so it is no surprise that most taxpayers lean towards the latter if any doubt exists especially now with mortgage interest relief restrictions in place.
Just because an expense is necessary doesn’t make it automatically allowable to claim now. Take an HMO (House of Multiple Occupation) where something has been fitted to a higher standard than normal to comply with special legal regulations – if the fitting is an improvement on the original (which due to legal reasons it would be) it is a capital expense and therefore cannot be claimed immediately.
So clearly understanding the capital v revenue distinction is crucial to ‘getting it right’!
Take the case of a modest apartment purchased by ‘Jack.’ The kitchen and bathroom are functional but ‘tired’ and the property could do with re-decorating throughout. This expenditure is perfectly allowable as the property was (importantly) habitable prior to the work commencing. Also the work will not significantly improve the underlying capital value of the property in the way that, say, an extra bedroom might. You may also then argue that the new kitchen and bathroom fittings are much better than what they replaced but critically, they are to a similar standard as the fittings they replaced when those previous fittings were new.
‘Jill’ on the other hand buys a large HMO with communal kitchen and bathroom areas and has to pay for additional safety features such as a second fire-rated door. The additional safety measures are considered an improvement and are not immediately deductible despite them being ‘necessary’ to get approval. Also, if Jill decides to add more kitchen storage space, more cookers or additional shower facilities this will be capital and not deductible now.
So in summary, understanding the capital v revenue distinction is all crucial in staying safe from the fiscal fiend…..and remember if you are not an expert, never ‘assume’ – it is the ‘ass’ in ‘u’ and ‘me’!
You can contact Jon Hook, at Norwich Accountancy Services, column sponsors, on 01603 630882.